Parabolic SAR

The Parabolic SAR is used to show price trends. It is similar to the Moving Average indicator, but accelerates more quickly:

The indicator is below the price line in bull markets

It is above the price line in bear markets

A trend ends when the price crosses the Parabolic SAR line

The Parabolic SAR is very good at telling you when to close a position:

Close long positions when the price falls below the Parabolic SAR

Close short positions when the price rises above the Parabolic SAR

You can also use the indicator as a trailing stop

Note that if the price is above the Parabolic SAR, the indicator will continue to rise; the amount of movement depends on the how much the price moved, not the direction of movement. Similarly, if the price is below the Parabolic SAR, the indicator will continue to fall.

Calculation

Calculation of the Parabolic SAR is quite complex; different equations are used depending on whether the indicator is rising or falling. In fact, the calculation is reset when the price line crosses the SAR line.

When the SAR is rising, it is below the current price and the price is rising. To get the current SAR, first the highest high in the upwards price trend is tracked.

EP is the highest high – EP stands for Extreme Point

Then, the previous interval’s SAR is subtracted from the Extreme Point from the previous interval. Since the SAR is below the price line, it is below the Extreme Point, and therefore the result is positive. This result is then multiplied by a positive acceleration factor, again giving a positive result. This is then added to the previous SAR to give the current SAR.

The effect of this is that the SAR always rises when it is below the price. Furthermore, it rises more and more quickly over time, as the acceleration factor can increase:

When the upwards trend first starts the acceleration is set to 0.02.

Each time a new highest high is reached, the acceleration factor is increased by 0.02, up to a maximum of 0.20.

The effect of this is that the SAR accelerates towards the price as the price rises.

IF ( HIGH( J )> EP( J – 1 ) )

EP( J ) = HIGH( J )

IF ( AF( J – 1 ) < 0.20 )

AF( J )= AF( J – 1 ) + 0.02

ELSE

AF( J ) = AF( J – 1 )

ELSE

EP( J ) = EP( J – 1 )

AF( J ) = AF( J – 1 )

Once the SAR catches up with the price, a new set of calculations is started, with the Extreme Point being used at the first SAR of the new trend; this means the SAR is now above the price line. The acceleration is reset to 0.02, and the SAR logic is reversed so that the SAR starts to move down towards the price line.

SAR( J ) = SAR( J – 1 ) + AF( J – 1 )* ( SAR( J – 1 ) -EP ( J – 1 ) )

IF ( LOW( J )< EP( J – 1 ) )

EP( J ) = LOW( J )

IF ( AF( J – 1 ) < 0.20 )

AF( J )= AF( J – 1 ) + 0.02

ELSE

AF( J ) = AF( J – 1 )

ELSE

EP( J ) = EP( J – 1 )

AF( J ) = AF( J – 1 )

You can find more information about technical indicators in the MetaTrader 4 User Guide. Select Help > Help Topics > Analytics > Technical Indicators.

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